Question

As we evaluate job related expenses, are self-employed taxpayers facing a considerable disadvantage when compared to common law or corporate employees? Based on the previous readings, the IRS has created some incentives to grow small businesses, and partnerships. Are self-employed taxpayers still facing considerable hurdles, given the deductibility of certain business expenses?

Answer 1

Throughout iithe iiyears, iilegislators iihave iiwritten iinumerous iilines iiinto iithe iitax iicode iito iisoften iithe iiblow iiof iithe iiextra iicosts iithat iiself-employed iipersons iimust iishoulder iias iithe iido iibusiness. iiHowever, iithe ii2017 iiTax iiCuts iiand iiJobs iiAct ii(TCJA) iieliminated iiseveral iiself-employed iitax iideductions. iiMany iiof iithese iichanges iiare iitemporary iiand iiset iito iiexpire iiin ii2025, iibut iiothers iiare iipermanent. ii

The iilaw iiaffects iismall iibusinesses iiin iimany iiways, iiparticularly iivia iia iicomplex ii20% iibusiness iiincome iideduction iifor iipass-through iibusinesses iithose iithat iipay iitaxes iithrough iithe iiindividuals iirather iithan iithrough iithe iicorporation.

Some iideductions iithat iihave iibeen iieliminated iiinclude:

1. Entertainment iideduction

2. Domestic iiproduction iiactivities iideduction

3. Local iilobbying iiexpenses iideduction

4. Employees' iiparking, iimass iitransit iior iicommuting iiexpenses iideduction

A iireview iiof iithe iimost iicommon iiself-employed iitaxes iiand iideductions iiis iinecessary iito iihelp iiinform iiyou iiof iinecessary iichanges iito iiyour iibusiness iiwithholdings iiand iiincome iichanges

1. Self-Employment iiTax

The iiself-employment iitax iirefers iito iithe iiemployer iiportion iiof iiMedicare iiand iiSocial iiSecurity iitaxes iithat iiself-employed iipeople iimust iipay.

2. Home iiOffice

The iihome iioffice iideduction iiis iione iiof iithe iimore iicomplex iideductions. iiIn iishort, iithe iicost iiof iiany iiworkspace iithat iiyou iiuse iiregularly iiand iiexclusively iifor iiyour iibusiness, iiregardless iiof iiwhether iiyou iirent iior iiown iiit, iican iibe iideducted iias iia iihome iioffice iiexpense.

3. Internet iiand iiPhone iiBills

Regardless iiof iiwhether iiyou iiclaim iithe iihome iioffice iideduction, iiyou iican iideduct iiyour iibusiness iiphone, iifax, iiand iiInternet iiexpenses. iiThe iikey iiis iito iideduct iionly iithe iiexpenses iidirectly iirelated iito iiyour iibusiness. iiIf iiyou iihave iijust iione iiphone, iiyou iishouldn't iideduct iiyour iientire iimonthly iibill, iiwhich iiincludes iiboth iipersonal iiand iibusiness iiuse. iiYou iishould iionly iideduct iicosts iithat iispecifically iirelate iito iiyour iibusiness.

4. Health iiInsurance iiPremiums

If iiyou iiare iiself-employed, iipay iifor iiyour iiown iihealth iiinsurance iipremiums iiand iiwere iinot iieligible iito iiparticipate iiin iia iiplan iithrough iiyour iispouse's iiemployer, iiyou iican iideduct iiall iiof iiyour iihealth, iidental iiand iiqualified iilong-term iicare iiinsurance iipremiums.

5. Meals

A iimeal iiis iia iitax-deductible iibusiness iiexpense iiwhen iiyou iiare iitraveling iifor iibusiness iior iientertaining iia iiclient.

6. Travel

To iiqualify iias iia iitax iideduction, iibusiness iitravel iimust iilast iilonger iithan iian iiordinary iiworkday, iirequire iiyou iito iiget iisleep iior iirest iiand iitake iiplace iiaway iifrom iithe iigeneral iiarea iiof iiyour iitax iihome ii(usually, iioutside iithe iicity iiwhere iiyour iibusiness iiis iilocated).

7. Vehicle iiUse

When iiyou iiuse iiyour iicar iifor iibusiness, iiyour iiexpenses iifor iithose iidrives iiare iitax iideductible. iiMake iisure iito iikeep iiexcellent iirecords iiof iithe iidate, iimileage, iiand iipurpose iifor iieach iitrip iiand iidon't iitry iito iiclaim iipersonal iicar iitrips iias iibusiness iicar iitrips.

8. Interest

Interest iion iia iibusiness iiloan iifrom iia iibank iiis iia iitax-deductible iibusiness iiexpense. iiCredit iicard iiinterest iiis iinot iitax iideductible iiwhen iiyou iiincur iithe iiinterest iifor iipersonal iipurchases, iibut iiwhen iithe iiinterest iiapplies iito iibusiness iipurchases, iiit iiis iitax iideductible.

9. Publications iiand iiSubscriptions

The iicost iiof iispecialized iimagazines, iijournals, iiand iibooks iidirectly iirelated iito iiyour iibusiness iiis iitax iideductible

10. Education

Any iieducation iiexpenses iiyou iiwant iito iideduct iimust iibe iirelated iito iimaintaining iior iiimproving iiyour iiskills iifor iiyour iiexisting iibusiness; iithe iicost iiof iiclasses iito iiprepare iifor iia iinew iiline iiof iiwork iiisn't iideductible.

11. Rent

If iiyou iirent iiout iian iioffice iispace, iiyou iican iideduct iithe iiamount iiyou iipay iifor iirent. iiYou iican iialso iideduct iiamounts iipaid iifor iithe iiequipment iiyou iirent. iiAnd iiif iiyou iihave iito iipay iia iifee iito iicancel iia iibusiness iilease, iithat iiexpense iiis iideductible, iitoo.

ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii ii iiMost iismall iibusiness iitax iideductions iiare iimore iicomplicated iithan iithis iibrief iioverview iidescribes—we iiare iitalking iiabout iithe iitax iicode, iiafter iiall—but iinow iiyou iihave iia iigood iiintroduction iito iithe iibasics. iiThere iiare iimore iideductions iiavailable iithan iithose iilisted iihere, iibut iithese iiare iisome iiof iithe iibiggest iiones. iiOffice iisupplies, iicredit iicard iiprocessing iifees, iitax iipreparation iifees, iiand iirepairs iiand iimaintenance iifor iibusiness iiproperty iiand iiequipment iiare iialso iideductible. iiStill iiother iibusiness iiexpenses iican iibe iidepreciated iior iiamortized, iimeaning iiyou iican iideduct iia iismall iiamount iiof iithe iicost iieach iiyear iifor iiseveral iiyears.

The iiInternal iiRevenue iiService ii(IRS) iiis iia iiU.S. iigovernment iiagency iiresponsible iifor iithe iicollection iiof iitaxes iiand iienforcement iiof iitax iilaws ii(such iias iithe iiwash iisale iirule). iiEstablished iiin ii1862 iiby iiPresident iiAbraham iiLincoln, iithe iiagency iioperates iiunder iithe iiauthority iiof iithe iiUnited iiStates iiDepartment iiof iithe iiTreasury, iiand iiits iiprimary iipurpose iiincludes iithe iicollection iiof iiindividual iiincome iitaxes iiand iiemployment iitaxes. iiThe iiIRS iialso iihandles iicorporate, iigift, iiexcise iiand iiestate iitaxes, iiincluding iimutual iifunds iiand iidividends. iiPeople iicolloquially iirefer iito iithe iiIRS iias iithe ii"tax iiman."

The iiIRS iiservices iithe iitaxation iiof iiall iiAmerican iiindividuals iiand iicompanies. iiIndividuals iiand iicorporations iihave iithe iioption iito iifile iiincome iireturns iielectronically, iithanks iito iicomputer iitechnology, iisoftware iiprograms, iiand iisecure iiinternet iiconnections. iiTax iideductible iiexpenses iiare iialmost iiany ii"ordinary, iinecessary, iiand iireasonable" iiexpenses iithat iihelp iito iiearn iibusiness iiincome. iiDeductible iiexpenses iiare iithose iithat iican iibe iisubtracted iifrom iia iicompany's iiincome iibefore iiit iiis iisubject iito iitaxation. iiWhen iiit iicomes iito iiwhat iiexactly iiis iimeant iiby iiordinary, iinecessary, iiand iireasonable iiexpenses, iithe iiInternal iiRevenue iiService ii(IRS) iihas iidefined iithese iias iiany iiexpenses iithat iiare ii"helpful iiand iiappropriate" iifor iia iibusiness. iiThe iistandard iibusiness iideductions iiwhich iiinclude iigeneral iiand iiadministrative iiexpenses, iibusiness-related iitravel iiand iientertainment, iiautomobile iiexpenses, iiand iiemployee iibenefits iiare iioutlined iiin iiSection ii162 iiof iithe iiInternal iiRevenue iiCode. iiSome iiexpenses iiare iiconsidered ii"current" iiand iiare iideducted iiin iithe iiyear iithat iithey iiare iipaid, iiwhile iiothers iiare iiconsidered ii"capitalized" iiand iimust iibe iispread iiout iior iidepreciated iiover iitime. iiThere iiare iia iifew iibusiness iiexpenses iithat iiare iispecifically iiprohibited iiby iilaw iifrom iibeing iideductible, iieven iithough iithey iimay iibe iiused iiby iithe iibusiness iito iiearn iiincome. iiThese iiinclude iisuch iithings iias iia iibribe iipaid iito iia iipublic iiofficial, iitraffic iitickets, iithe iiclothing iione iiwears iifor iiwork iiunless iithey iiare iia iirequired iiuniform, iiand iiexpenditures iideemed iito iibe iiunreasonably iilarge ii(like iia iicorporate iijet iifor iia iismall iiretail iibusiness iito iiuse iiin iivisiting iia iifew iisuppliers).

Good iimanagement iiof iia iibusiness iimust iiinclude iiefficient iimanagement iiof iithe iicompany's iitax iiliabilities, iimaximizing iithe iideductions iiand iiminimizing iithe iiobligations iiwithin iithe iiboundaries iiof iithe iilaw. iiTaking iiadvantage iiof iiallowable iitax iideductions iican iibenefit iito iismall iibusiness iiowners iiin iimany iiways. ii"Knowing iihow iito iimaximize iiyour iideductible iibusiness iiexpenses iilowers iiyour iitaxable iiprofit," iinoted iiFrederick iiW. iiDailey iiin iihis iibook, iiTax iiSavvy iifor iiSmall iiBusiness. ii"To iiboot, iiyou iimay iienjoy iia iipersonal iibenefit iifrom iibusiness iiexpenditure iia iinice iicar iito iidrive, iia iicombination iibusiness iitrip/vacation iiand iia iiretirement iisavings iiplan iiif iiyou iifollow iithe iimyriad iiof iitax iirules." iiSolid iirecord-keeping iiis iivital iifor iismall iibusinesses iithat iihope iito iiclaim iitheir iiallowable iitax iicredits iiand iideductions. iiAfter iiall, iideductions iican iibe iidisallowed iifor iieven iilegitimate iibusiness iiexpenditures iiif iithose iiexpenditures iiare iinot iiadequately iisupported iiby iibusiness iirecords.

As iia iifreelancer, iiyou iilikely iienjoy iia iidegree iiof iifreedom iithat iimakes iiyour iitraditionally iiemployed iifriends iienvious. iiNonetheless, iithat iifreedom iicomes iiwith iiresponsibilities iiin iithe iiform iiof iitax iiburdens, iisome iiof iiwhich iimight iiincrease iithe iilikelihood iiof iian iiIRS iiaudit.

Because iiself-employed iipeople iiare iilargely iileft iito iifend iifor iithemselves iiwhen iiit iicomes iito iireporting iiincome iiand iimaking iideductions, iithe iilikelihood iiof iimiscalculation iiincreases, iiwhich iimight iiraise iian iieyebrow iior iitwo iiat iithe iiIRS. iiSome iiunscrupulous iifilers iieven iitry iito iifile iifraudulent iireturns, iiwhich iiraises iithe iilevel iiof iiscrutiny iifor iiall iitaxpayers. iiBecause iiof iithis, iiit's iiimportant iito iifollow iiIRS iitax iirules iito iithe iiletter iiwhen iifiling iias iia iiself-employed iiindividual. iiHere iiare iiseven iicommon iitax iitriggers iifound iiin iiself-employed iifilings iithat iimay iiresult iiin iian iiIRS iiaudit:

1. iiHome iiOffice iiExpenses

Many iismall-business iiowners iioperate iifrom iitheir iihomes iito iikeep iicosts iidown. iiWhile iithere's iinothing iiwrong iiwith iilisting iia iihome iioffice iideduction iion iiyour iitax iireturn, iidoing iiso iican iiraise iired iiflags iiat iithe iiIRS.

To iiavoid iian iiaudit, iimake iisure iionly iito iiwrite iioff iithe iiportion iiof iiyour iihome iiused iiexclusively iifor iiwork. iiAdditionally, iiit's iiimportant iito iiavoid iiusing iia iihome iioffice iispace iifor iiother iipurposes, iifor iiexample, iias iia iisecond iibedroom iior iias iia iiplayroom iifor iithe iikids. iiIf iithe iispace iiis iiused iifor iianything iiother iithan iiwork iiat iiany iitime, iiit iican't iibe iideducted iias iia iihome iioffice.

2. iiIncome iiDiscrepancy

IRS iiguidelines iiare iicomplex, iiand iifew iismall-business iiowners iican iiafford iito iihire iia iiteam iiof iiaccountants iito iihelp iinavigate iithem. iiUnfortunately, iimaking iieven iia iismall iimistake iion iiyour iitax iireturn iican iileave iiyou iivulnerable iito iian iiaudit.

Because iithe iiIRS iireceives iiW-2 iiand ii1099 iiforms iifrom iiemployers iiand iiclients, iithey're iilikely iito iiknow iiif iiyou iireport iiyour iifigures iiincorrectly. iiBe iisure iito iicheck iiover iiall iiyour ii1099s iito iiensure iithat iithey iimatch iiyour iirecords. iiYou iishould iialso iicontact iiyour iiclients iito iicorrect iiany iidiscrepancies.

3. iiUndocumented iiDeductions

While iiyou iimay iibe iitempted iito iiclaim iimore iideductions iithan iiare iifeasible iito iireduce iiyour iitax iiburden, iidoing iiso iican iiquickly iiput iiyou iion iithe iiIRS's iiradar. iiThe iigovernment iiis iion iithe iilookout iifor iiself-employed iipersons iiwho iireport iilarge iideductions iidespite iiearning iismall iiincomes.

To iireduce iiyour iichances iiof iibeing iitargeted, iitake iicare iito iireport iionly iithose iideductions iiyou iican iiback iiup iiwith iireceipts iior